Gold Drops $48 as Markets Price in Surprise Rate Hike

The Federal Reserve's two-day meeting concluded today, but its decision to raise interest rates by a quarter point tomorrow has already sent shockwaves through markets. According to Frank Flight, head of macro strategy at Citadel Securities, the Fed will indeed hike rates, citing that this move would 'decisively end the forward guidance era' and cement Chairman Kevin Warsh's credibility as an inflation fighter.

A surprise rate hike pushes real yields higher, making it more expensive for investors to hold gold, which earns no interest. As a result, the market has already partially priced in this expectation, contributing to gold's $48 drop today.

The odds of a quarter-point rate hike have increased significantly, reaching 35.8% as of this morning, up from 25.77% last week and roughly 10-15% two weeks ago after the June CPI print came in soft and reduced hike expectations sharply. This high probability is unusual close to a decision, typically markets converge on a high-confidence consensus by Tuesday of a Fed week.

Oil prices have also fallen below $80 per barrel for the first time since before the US-Iran conflict began, which normally benefits gold as lower energy prices ease inflation pressure. However, today's decline in oil did not positively impact gold due to the stronger market narrative surrounding the Fed's rate decision.